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January 17, 2013

AT&T Inc. is once again starting up its deal machine.

The telecommunications giant is considering buying a counterpart in Europe, a bet that it can best escape constraints on growth at home by getting into a new wireless market where it can upgrade technology and roll out more lucrative pricing strategies, people familiar with the carrier's thinking said. The company is currently studying targets, and a deal-if one happens-could come before the end of the year, those people said.

Such a deal would carry a lot of risk. Wireless companies have pursued international strategies before with mixed results. There would be few opportunities to make the deep cost cuts that are typically needed to justify big acquisitions because the networks wouldn't overlap. AT&T also would be stepping into a much more competitive market than it has in the U.S. and would face a new set of regulators. AT&T's top executives are debating whether a move abroad would make sense, but some believe a unique opening now exists to buy a carrier in a major European market such as the U.K., Germany or the Netherlands, the people said.

Consideration of an overseas merger comes almost two years after Chief Executive Randall Stephenson unveiled his $39 billion plan to acquire T-Mobile USA, which U.S. antitrust authorities shot down, blunting AT&T's efforts to expand further at home. The carrier is now weighing the benefits of competing in one of Western Europe's major economies against the risks of taking focus away from the U.S., where it would face tougher competition once Japan's Softbank Corp. completes its acquisition of Sprint Nextel Corp., the people said. It is expected to conclude later this year. It couldn't be learned whether AT&T is engaged in negotiations with European carriers or which companies it might be circling. European carriers including Royal KPN NV, the biggest telecom company in the Netherlands and Everything Everywhere, one of the biggest wireless carriers in the U.K., are on AT&T's radar, the people said.

KPN is already 28% owned by Latin American telecom giant America Movil, a company in which AT&T owns a small stake and whose owner, Carlos Slim, is a close friend of Mr. Stephenson. KPN looked into selling its Belgian and German wireless subsidiaries last year but said it concluded that process without reaching a deal. Everything Everywhere is co-owned by Deutsche Telekom AG and France Telecom SA.

While AT&T and its predecessor, SBC Communications Inc., have mulled overseas deals for more than a decade, the timing now appeals to some at AT&T. Investors have pummeled the shares of European phone companies amid economic turmoil and fierce competition for wireless customers, leaving companies cheaper to buy. European companies also have been slow to roll out advanced "4G" wireless networks and to adopt more lucrative pricing schemes. European carriers still rely heavily on fees for voice calls and text messages, while their big U.S. counterparts have shifted aggressively to new plans that charge subscribers based on their data use.

More broadly, advocates think converging technology and better terms for connecting international calls create an opening to begin linking countries with common wireless plans the way U.S. carriers linked up the states in the last two decades. Deal advocates say that those trends leave an opening for AT&T to get in early when the European market becomes more data centric.

AT&T generated more than $11 billion in profit in the first nine months of 2012 and has had success getting smartphone-toting U.S. customers to pay more for wireless data. SBC Communications also held small stakes in European wireless carriers a decade ago, including in Denmark, Belgium and France. But by 2004 the company was selling its overseas stakes. In the last half decade, AT&T itself browsed for deals in India and unsuccessfully pursued a stake in Telecom Italia, people familiar with the matter said. But there was plenty of growth was to be had in the U.S. as the smartphone boom took off. The carrier, along with rival Verizon Wireless has a virtual lock on the U.S. market, controlling most of the industry's lucrative contract customers and virtually all of its profits. In Europe, AT&T would have to contend with fierce competition and fiscal crises that bedevil the region's economy.

But now that most Americans already have smartphones, the opportunities to move cellphone users up to more expensive pricing plans are dwindling. At an investor conference in June, Mr. Stephenson was circumspect when he was asked about overseas expansion. "We'll take a hard look," he said. But, he added, "It isn't a high priority for me to go find options outside the U.S. right now," according to a transcript. By the end of the year, he had changed his tune. In a Texas Monthly story published earlier this month, Mr. Stephenson was asked if he thinks AT&T will acquire companies overseas in order to keep growing. "I think it is inevitable," the CEO said. Wall Street Journal